 "NSE LEADs THE WAY IN INDIA")
The Street’s enthusiasm around the initial public offer (IPO) of the National Stock Exchange (NSE) seems justified, given its leadership position in all segments of the domestic market and strong position among global exchanges.
NSE is looking to raise up to Rs 10,000 crore through this IPO, which is a pure offer-for-sale (OFS), and it will witness partial exits by key investors, including State Bank of India (SBI), IFCI and IDBI Bank. The offer is for a 22.5% stake, which puts NSE’s valuation at Rs 44,500 crore. Though a stake sale by SBI in July valued NSE at Rs 18,220 crore, experts believe it deserves more.
Ashish Chopra, analyst at Motilal Oswal Securities says, “NSE can easily command 30 times one-year forward price-earnings ratio, similar to the multiple commanded by exchanges such as Hong Kong and SGX, which also enjoy leadership positions in high growth potential markets. NSE’s valuation will not be below Rs 40,000 crore.” Back home, the Multi Commodity Exchange, or MCX, commands a valuation of 43 times 2016-17 estimated earnings.
On the flip side, the NSE draft IPO document states the Securities and Exchange Board of India (Sebi) is investigating a case of possible preferential treatment by the exchange to select brokerages who had early access to its servers. These transactions constituted about 29% of NSE’s revenues in the first half of 2016-17 and the company is now required to park this money in a separate bank account on Sebi’s directions. Market experts, however, said an adverse ruling would not materially impact NSE’s revenue or valuation.
Deven Choksey, managing director at KR Choksey Investment Managers, says, “Sebi will rationalise algorithm trading norms and the preferential treatment to high-value customers will be discontinued. But that does not mean it will have an adverse impact on NSE’s business because algorithm trading is a reality and customers will need it.” Choksey believes after listing NSE could witness 15-20% growth in its market capitalisation over the next couple of years.
NSE’s key growth strategies include launching new products and services to diversify its revenue, focusing on under-penetrated markets to add new issuers and investors, and launching an international exchange and clearing corporation in GIFT city. High entry barriers in the exchanges business will also aid NSE in maintaining its leadership position, believe analysts. Strong operating profit margins (of over 60%), as well as return ratios, are other strengths of NSE. These margins appear sustainable given that the business is not capex heavy, with a bulk of its investments in technology. With most costs being fixed and volumes heading north, NSE may not find it difficult to maintain these high margins, believe analysts.
Though the Street is buoyant about NSE's IPO, its financial performance has been volatile. Its consolidated revenues, for instance, grew a mere 7.7% in 2015-16, down from 27% in 2014-15. Though operating profit margin remained stable, net profit fell 1.9% in 2015-16 after growing 32% in 2014-15. “It will never be a linear play as the business model is a play on the volumes traded on the exchange. As long as the scope for volumes going on the higher side is good, it is not a concern. I think newer segments should also see higher volumes," says Chopra of Motilal Oswal Securities.
The sharp outflow of FII money and a rising proportion of option volumes, which have lower revenues than cash transactions, are the key downside risks. Some analysts believe the preferred brokers issue might dissuade some investors in the near term even as most experts are ruling out any tough decision by Sebi on this front. NSE derives one-third of its revenues from non-core income stream comprising investment, dividends and interest income, which could come under pressure in a falling interest rate environment.
Overall, the NSE IPO offers an attractive opportunity for investors to participate in the long-term growth of exchanges.
G Chokkalingam, founder and CEO, Equinomics Research & Advisory, says, "The IPO will do very well as NSE has grown faster than its peers. This business can only grow because the investor base is only 3%.”
